Ever hear someone say their parent's house could be sold with little tax hit? That result often ties to the step-up in basis rule, a quiet part of the tax code that can save heirs a lot of money. At Peach State Wills & Trusts®, we help Georgia families with wills, trusts, and powers of attorney, always with transparent communication and a steady plan to protect loved ones.

We offer planning that fits real life, not one-size-fits-all forms. Our aim here is simple: explain in general terms how the step-up in basis works, why it can help your heirs, and how to plan around it with care. If you own property, investments, or a small business, this is worth a closer look. Note that this is not tax and accounting guidance for your particular situation, and understand that tax laws can, and do, change. Therefore, this information may or may not be current and complete at the time you read this blog post. 

What is the Step-Up in Basis?

Generally speaking, the step-up in basis is a tax rule that resets the cost basis of inherited property to its fair market value on the date of death. The “cost basis” is usually what the original owner paid for the asset, and that amount is used to calculate capital gains tax when the asset is sold. By stepping up the basis to the date-of-death value, the growth that occurred during the original owner's lifetime is wiped out for capital gains tax purposes.

IRS 26 U.S. Code § 1014 says that property held at death receives a new basis equal to the property's fair market value at that time. The step-up basis also applies to revocable living trusts. With the right records and timing, heirs often face far less tax when they sell.

With that foundation in place, let's look at how this rule plays out with numbers and actual setups.

How the Step-Up in Basis Works

Big picture, the tax code resets the basis at death, then any later sale by the heir looks only at gain or loss after that date. The result can be a far smaller tax bill. A few examples help show the math.

Basic Calculation

On the date of death, the heir's or beneficiary's cost basis becomes the asset's fair market value on the day the Decedent died. That value becomes the starting point for any future gain or loss. If the heir or beneficiary sells soon after, there might be little or no taxable gain.

For example, a stock bought for 2 dollars grows to 15 dollars by the owner's date of death. The heir's new basis is 15 dollars, so the 13-dollar increase during the owner's life is not taxed if the heir sells at 15 dollars. Future growth above 15 dollars can be taxed when sold.

Now, let's see how marriage property systems change the result for a surviving spouse.

Community Property States

In community property states, both halves of community property generally receive a step-up in basis at the first spouse's death. The states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. This setup can create a bigger reset for the survivor compared to common law states.

For instance, a couple in California buys a home for $500,000, and it is worth $600,000 when one spouse dies. The entire property receives a new basis of $600,000. If the survivor sells for $600,000 dollars soon after, there is no capital gain.

Some states offer community property trusts that allow residents to choose community treatment for certain assets, including Alaska, Kentucky, South Dakota, and Tennessee. This tool can help a married couple outside a traditional community property state get a similar step-up result. Good records and trust drafting matter here.

Common law states work differently, and the contrast is important.

Common Law States

In common law states, only the deceased spouse's portion of jointly owned property steps up. The survivor keeps their original basis for their share. The combined basis after death becomes a mix of stepped-up and old numbers.

For example, a couple in New Jersey buys a home for 500,000 dollars, half each. At the first spouse's death, the home is worth 600,000 dollars. The survivor's new basis becomes 550,000 dollars, made up of a 300,000-dollar stepped-up half plus a 250,000-dollar original half.

Now that we have the mechanics down, let's cover what types of property get this treatment.

Eligible Assets for Step-Up in Basis

Many assets receive a basis reset at death under Section 1014. Here are common ones that families hold.

• Real estate, including primary homes and rental properties.

• Stocks and bonds in taxable brokerage accounts.

• Mutual funds.

• Art and collectibles.

• Business interests in closely held or private companies.

• Assets held in a revocable living trust, since those remain part of the taxable estate at death.

Not every asset is eligible, and that split can surprise people.

Assets That Do Not Qualify

Certain assets do not receive a basis step-up. These often follow different tax rules that apply later to the beneficiary.

• Bank accounts and cash.

• Certificates of deposit.

• Retirement accounts like 401(k)s and traditional IRAs.

• Pensions.

• Annuities.

Next, let's compare inheriting with lifetime gifting, since the tax result can be dramatically different.

Step-Up in Basis vs. Gifting

What Happens When You Inherit Eligible Property? You Get A  Step-up In Basis

• You get a brand new starting value based on what the property is worth when the person dies

• It's like the IRS hits a reset button on the price

• If you sell it right away, you likely owe little or no capital gains tax

• Example: Grandma paid $50,000 for a house. It's worth $300,000 upon her death.  You inherit it and your cost basis is $300,000 (its value at Grandma's death). Your new starting value = $300,000

 

What Happens When You Receive a Gift

• You don't get a reset; instead, you inherit the giver's original price

• This is called a "carryover basis."

• If you sell it later, you owe taxes on all the growth, even growth that happened before you owned it.

• Same example: Grandma gifts you that house while alive. Your starting value = $50,000, and you'd potentially owe capital gains taxes on $250,000 in gain when you sell, unless you qualified for an exemption. 

• Note that regardless of Grandma added you to the deed as a joint owner during her lifetime and then she died, or just deeded the entire property over to you during her lifetime, the result is the same. It's treated as a gift, and not an inheritance.

 

Quick Comparison

 

The Gift Tax Rule

• In 2025, you can gift up to $19,000 per person per year with no gift tax being due or any gift tax return being filed.

• This is a useful way to shrink an estate over time

• But gifting property that has grown a lot in value can hand the recipient a big future tax bill, as there is no step-up in basis for a gift.  

The Bottom Line

• Inheriting = better deal on capital gains taxes (basis resets)

• Gifting appreciated property = the tax problem gets passed to the recipient

• Always weigh the tax cost against other goals before giving away property while you're still alive

Potential Changes to the Step-Up in Basis Rule

From time to time, Congress floats ideas to trim or even remove the step-up basis. That type of change could raise future taxes on appreciated assets left to heirs. News cycles come and go, yet a shift here could matter a lot to your plan.

For example, in 2021, the White House proposed eliminating the step-up in tax basis for gains over $1 million, or $2.5 million for couples. The STEP Act was introduced in the Senate on March 29, 2021. Neither passed.

Keeping tabs on proposals helps you react with smart timing. If new rules target the basis or timing of capital gains, an update to your documents and ownership setup can soften the blow. With possible shifts in mind, you can still build a plan that uses the current law to your advantage.

How to Make the Most of the Step-Up in Basis in Your Estate Plan

Several moves can help your family get the full value of this rule. The right choices depend on your goals, health, and time horizon.

• Hold appreciated assets, retain highly appreciated property so heirs receive a stepped-up basis at death.

• Use revocable living trusts, keep control during life,  and preserve the step-up at death.

• Be mindful of gifting, avoid shifting large, unrealized gains to loved ones unless non-tax goals clearly call for it.

• Watch estate tax thresholds: for 2026, the estate tax exemption is $15 million per person, or $30 million per married couple if portability is claimed and used.

Good records matter too, such as appraisals for real estate and statements for brokerage holdings, making the new basis explicit.

If Georgia is home, local guidance helps tie these ideas together with real estate deeds, and family estate and trust plans.

Planning Your Estate in Georgia? Contact Peach State Wills & Trusts® Today

At Peach State Wills & Trusts®, we help Georgians protect their families, preserve their growth, and keep taxes from taking a bigger bite than necessary. We value clear conversations, simple documents where possible, and steady follow-through from start to finish.

We welcome your questions about step-up in basis, gifting, trusts, and probate. Feel free to call us at 678-344-5342 or use our Contact Page to set a time to talk. A short chat can bring real understanding and help you move forward with confidence.

Do you want to know more about estate planning in Georgia? If so, look at our free planning guide. Learn how your estate plan can support your final wishes and make things easier for your family.